Created in 1892 as a result of a merger between Edison General Electric Company and Thomson-Houston Company, General Electric Company (NYSE:GE) is one of the oldest companies in America. Naturally, with age comes recognition and trust. Last year, GE rounded out the top ten list of Forbes’ most valuable global brands.
While that’s an incredible honor, GE stock as an investment doesn’t really stand out.
Sure, the dividend yield is great, and the company for the most part chugs along. But because its portfolio is so diversified, no one really knows what to make of General Electric. Is it a technology company or an energy company? Avionics or medicine? The ambiguity makes GE stock fairly boring.
Boring, though, is a relative term. For those who value stability and safety, boring is good. Since the start of this decade, General Electric has only stumbled once in terms of annual returns. That was in 2014, when shares lost 5%. Every other year, General Electric averaged double-digit gains, bringing the total average return since 2010 to 15%.
Unfortunately, GE stock is doing some “un-GE” things as of late. Since April 20, shares have dropped 4% in value. This occurred against the backdrop of a solid earnings beat for the first quarter of fiscal year 2017. To paraphrase President Donald Trump, just what in the hell is going on with GE?
GE Stock Has Lost Its Luster
According to InvestorPlace contributor Vince Martin, GE ironically suffers from a trust issue. While consumers love their products, investors are having an opposite reaction. That comes from reading between the lines.
The most conspicuous element is the black hole in cash flow. As Mr. Martin points out, “GE burned $1.6 billion in the quarter — a full billion more than it had projected.” That’s going to hurt market prospects moving forward because General Electric has aggressively bought back shares. This tactic has helped drive earnings growth in the past, but it can’t keep this up indefinitely.
Another reason for the volatility in GE stock is comparative performance. Rival Honeywell International Inc. (NYSE:HON) has steadily grown its earnings, with just a few hiccups along the way. In contrast, General Electric is sporadic at best. And you don’t have to have deep financial insight to notice the difference. HON is up over 13% year-to-date, while GE stock is down more than 8%.
Finally, InvestorPlace’s Chris Fraley states emphatically that General Electric lacks the “wow factor.” Though GE certainly carries “tech cred,” current investors prefer sexier names like Amazon.com, Inc. (NASDAQ:AMZN) and Tesla Inc (NASDAQ:TSLA). Mr. Fraley writes that “In many investors’ minds, General Electric is yesterday’s news — which is why institutional ownership has fallen from 71% to 56% since the beginning of 2016.”
GE Is a Long-Haul Trucker, Not a Street Racer
These are harsh words, and not entirely unfounded. Admittedly, it makes me feel as if I’m on an island in a sea of bad news. But I think investors can still trust GE stock even though it’s hard.
First, let’s talk about the Baker Hughes Incorporated (NYSE:BHI) merger. Kinks must be worked out, but should it go through, it could be a significant boost for General Electric. This is a point that Mr. Fraley concedes with a caveat. “Now, if oil prices break free of their $40-to-$50 malaise now that OPEC is considering extending its production cuts, then the above estimates might be conservative and the Baker Hughes deal might be more of a difference maker.”
Will oil prices move higher? I believe so. Based on the technical charts of the oil markets, the prices are “rounding out” the bearishness. In other words, the bears have attempted to drop oil below key technical thresholds, but were only temporarily successful. This implies confidence is returning to crude oil, which coincidentally is aligning with the aforementioned OPEC discussions.
Also, this is the reason why I’m bullish on ConocoPhillips (NYSE:COP) despite its earnings disappointment.
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Some might say that’s a bygone era. But even during the trailing five years, we’ve seen multiple bear attacks on GE stock. Each time, the company picks itself up and trudges on. This time is probably no different.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
